Physician hospital organizations are firing back at President Obama’s health care law in the press and the courts, seeking a repeal of what they argue are “exclusionary and unconstitutional” restrictions.

Section 6001 of the health care law effectively bans new physician-owned hospitals (POHs) from starting up, and it keeps existing ones from expanding. It has already halted the development of 24 new physician-owned hospitals and forced an additional 47 to struggle to meet the deadline to complete construction, according to the Physician Hospitals of America (PHA).

PHA and the Texas Spine and Joint Hospital (TSJH) filed suit against U.S. Health and Human Services Secretary Kathleen Sebelius in June. Pretrial arguments have been completed, and the trial began in December in Tyler, Texas.

Judge Allowed Trial to Continue

On Nov. 24, U.S. District Court Judge Michael Schneider ruled Section 6001 does not violate any constitutional rights, but he also ruled the hospital and PHA were within their rights to sue in federal court. This gives the plaintiffs a leg up if a motion for appeal has to be filed, according to their attorney, Scott Oostdyk of McGuireWoods.

“We filed seeking an injunction in 2010 since the new law prevents us from expanding bed spaces and limits the growth of POHs in physical terms. The court decided it had jurisdiction in the case,” says Oostdyk. “So far this has been the only case challenging the new law.”

Another problem with the new law is that if POHs expand, they cannot accept Medicare patients—a serious barrier for new hospitals.

“About 60 percent of the billing from POHs is from Medicare, so they've cut off half of the financing and funding of this business model,” explains Oostdyk. “That competition has been curtailed, and physicians will no longer invest in this business model. If you can't build new facilities or expand old ones, there is no growth.”

‘Focused Factories’

Oostdyk says trade associations for other types of hospitals wanted the onerous new regulations written into the law, since they view POHs as formidable competition to their business model. Robert Moffit, a senior fellow with the Heritage Foundation, says this is because POHs are what Harvard Business School professor Regina Herzlinger calls "focused factories" in health care.

“What a focused factory does is specialize in one type of procedure or treatment. Through specialization, they achieve higher outcomes and advances in the industry,” says Moffitt. “This is a natural development in an advanced economy, and it’s happening in other areas of the economy, so it is inevitable that it would happen in health care. In other words, there's a positive correlation associated with specialization.”

Moffit says as long as there is disclosure about who the owners of the hospital are, patients stand to benefit.

“Unfortunately, general hospitals have lobbied Congress to limit competition,” Moffit said. “The federal government has set up viscous barriers to opening and operating POHs. It's simple rent seeking at the expense of the public.”

Hospital Establishment vs. POHs

Dr. Michael Russell, president of PHA and a TSJH partner, argues POHs have had a positive effect on health care, particularly for patients.

“Specialization has led to decreased costs and better outcomes,” says Russell. “Physician owned hospitals are more efficient, decrease costs, produce better outcomes, and increase patient satisfaction. Every major consumer report shows that in every state that physician owned hospitals operate, they've increased quality.”

According to Matt Fenwick, a spokesman for the American Hospital Association (AHA), which represents close to 5,000 hospitals and other care providers, their hospitals view POHs with great suspicion.

“Physician self-referral—when physicians own the facilities to which they refer patients—has long been a concern in health care because of the potential for conflicts to arise between the needs of the patient and the financial interests of the physician,” claims Fenwick.

“Conflict of interest concerns are just a smokescreen,” Russell counters. “Whenever a patient comes to see me, I have no idea what is wrong with them. I diagnose them, and then it's their decision or the decision of the patient’s insurance about where they go to be treated.”

Russell also dismisses another complaint from the AHA—that physician owned hospitals don't take “charity cases.”

“This is not true,” Russell said. “What the government ought to be doing is sending more Medicaid and Medicare patients to physician owned hospitals: The outcomes are better, it's cheaper, and patients are more satisfied. In the long term, it would save the government more money if they sent more patients to POHs.”

Competition Via Law, Not Marketplace

According to Russell, the AHA, along with Sen. Baucus (D-MT) and Congressman Pete Stark (D-CA), are responsible for the language in Section 6001.

“There are so many regulations and they are so onerous and intrusive that we believe that the section was deliberately designed so no physician owned hospital could successfully comply,” said Russell.

Russell maintains this is competition via law instead of the marketplace.

“What physician owned hospitals represent is a disruption. In fact, there's no greater market needing a disruption than health care. Until there's a disruption, this market cannot evolve,” said Russell. “Clearly the AHA is trying to protect its business model, which is better suited for the 1940 and 1950s than today.”